Gold vs. SP 500 - Where is the Value?

This past week we received the final 4th Quarter GDP number which came in
at 0.39%. The total 4th Quarter growth was terrible, plain and simple. Based
on the performance in the equity markets that we have seen thus far in the
1st Quarter of 2013 investors would expect strong GDP growth. However, the
only thing spurring stock market growth is the constant humming of Ben Bernanke's
printing press.

The real economy and the stock market are no longer strongly correlated. Essentially,
they are meaningless. How do you evaluate risk when Treasury linked interest
rates are artificially being held down by the Federal Reserve? How do you evaluate
earnings growth estimates when most government based statistics are manipulated
or "smoothed" to perfection?

My final argument to anyone who is a true believer that the stock market is
representative of the economy is a very simple premise. If the stock market
is the economy, how does the stock market evaluate small business earnings
growth when most small businesses are not publicly traded? It is a simple question,
but I have yet to find a sell side analyst that can work around it with facts.

To back up this information, here is a chart courtesy of www.zerohedge.com that
demonstrates the S&P 500's price action compared to economic data and overall
macro risk.

The chart above clearly depicts the divergence between the macroeconomic data
and the performance of the S&P 500 Index. Yet the sell side continues to
scream that stocks are cheap, earnings are going to ramp up later this year
on insane S&P 500 earnings growth expectations, and the consumer is going
to remain strong even though payroll taxes have increased and the "wealthy" are
paying more in taxes.

Even amid those concerns, no one knows for sure what the impact that Obamacare
and the various new taxes associated with it will have on the business community.
Again, the only thing driving growth is directly linked to the Federal Reserve's
balance sheet expansion. The chart below is courtesy of the Federal Reserve's
website.

On August 8, 2007 the Federal Reserve's total assets were $869 billion dollars.
As can clearly be seen today, according to the Federal Reserve the central
bank's total balance sheet has grown to over $3.2 trillion dollars. The increase
is on the verge of rising exponentially. With QE, QE2, QE3, Operation Twist,
Extended Operation Twist, and now with QE 4 in Perpetuity this trend is certainly
unlikely to shift.

At this point in time the Federal Reserve is printing roughly $85 billion
dollars each month to purchase Treasury securities with a focus on the long
end of the maturity curve. As primary dealers of Treasury securities process
these flows the money eventually finds its way into riskier assets that offer
higher rates of returns through balance sheet machinations at large money center
banks.

It has proven that the flow of the Federal Reserve's printed monies are more
important than the total money stock for a variety of reasons and inflation
according to the government's data is under control ex food and energy.

However, how are people supposed to survive without food and energy in today's
world? The last time I went to fill up my gas tank or to purchase food prices
have gone up significantly. According to the 1990 version of consumer price
reporting, real consumer inflation is running around 6% currently and shadowstats.com
has the following comparison.

Unfortunately the 1980 based inflation numbers are even uglier, which based
on Shadowstats' data chart would place consumer inflation at nearly 10%. The
calculations being used by Shadowstats.com are based on the government's OLD
ways of calculating inflation. The calculations were adjusted over time and
today the data is completely manipulated by not including items that typically
experience the largest levels of inflation.

Normally I talk about price action, probability based option trading, and
technical information. However, before investors consider buying stocks near
the all-time NOMINAL (non-inflation adjusted) highs, why not simply consider
the backdrop of the total economic situation.

Central banks around the world are printing money at an alarming rate and
their balance sheets are growing to levels not seen in human history. Interest
rates are being manipulated to levels that are historically at record lows
or near record lows based on real inflation data.

Macroeconomic indicators are issuing a cautionary tone with significant divergences
showing up in many areas. Earnings expectations for the S&P 500 in the
3rd and 4th Quarter of 2013 are extreme and borderline ridiculous.

So before jumping headlong into equities based on some sell side analysts
recommendation or even worse, a financial advisor who is more interested in
his/her commission than they are about producing gains consider the following
comparisons.

S&P 500 Index (SPX) Price Chart - 1 Year Price History

Gold Futures Spot Price Chart - 1 Year Price History

Clearly paper gold represented by gold futures is no substitute for physical
ownership, but when one considers the fundamental backdrop for gold versus
the S&P 500 Index, it should be clear which asset is offering the most
value at current price levels. It does not require any inserted trendlines
or oscillators, it should be clear which asset is expensive and which asset
is cheap based on the real long-term economic fundamentals.

I will give you a hint regarding which asset is offering the most value. It
can't be printed, it has represented the store of value since the advent of
modern civilization, and it is senior to all paper currencies.

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J.W. Jones is an independent options trader using multiple forms of analysis
to guide his option trading strategies. Jones has an extensive background
in portfolio analysis and analytics as well as risk analysis. J.W. strives
to help traders that are missing opportunities trading options. He also commits
to writing content which is not only educational, but entertaining as well.
Regular readers will develop the knowledge and skills to trade options competently
over time. Jones focuses on writing spreads in situations where risk is clearly
defined and high potential returns can be realized.

This material should not be considered investment advice. J.W. Jones is not
a registered investment advisor. Under no circumstances should any content
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or her registered investment advisor. This information is for educational
purposes only.